Financial Accounting Analysis and Reporting

This assignment delves into financial accounting analysis and reporting. Students are tasked with analyzing financial statements from publicly traded companies such as Alcoa, Tesco, and WOW, gaining insights into their financial performance and position. The assignment also touches upon broader themes in accounting research, including its role in informing stakeholders about company performance and the impact of accounting practices on the banking industry.

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance Financial Accounting
University Name
Student Name
Authors’ Note

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Table of Contents
Measurement concepts in association to historical cost and fair value accounting...................2
Evaluation of benefits and challenges of using historical cost and fair value accounting for
PPE and intangibles....................................................................................................................4
Identification of valuation practices and for non-financial assets: PPE and intangibles...........6
Examination whether PPE and intangibles are consistent across three firms..........................10
Opinion regarding free choice between historical cost and fair value accounting..................11
References................................................................................................................................13

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Measurement concepts in association to historical cost and fair value accounting
As per IFRS 13 (Fair Value Measurement), fair value is essentially a market based
enumeration and not necessarily an entity specific dimension. As such, market transactions or
else market information might perhaps be available or not available for certain assets as well
as liabilities (Warren and Jones 2018). Nevertheless, the aim of a fair value measurement in
both the cases is identical for estimating the price at which an orderly transaction to market to
the asset or else to transfer the asset happens between participants of the market at the date of
measurement under present measurement conditions. Essentially, this IFRS is applicable at
the time when another IFRS allows fair value enumeration or disclosures regarding fair value
measurement, founded on fair value otherwise disclosures regarding those measurement (ref:
paragraph 5 IFRS 13). According to paragraph 11, a fair value dimension is for a specific
asset or else a liability. Thus, at the time of measuring fair value a specific entity needs to
consider the features of the asset or else liability in case if participants of market would
consider those features at the time of pricing firm’s asset or else liabilities at the date of
measurement. However, this kind of characteristics contains the condition as well as location
of the asst along with restrictions if at all on the sale or on the usage of the asset. In essence,
asset or else liabilities enumerated at fair value can be a standalone asset/liability or a group
of assets and/or liabilities (Henderson et al. 2015).
As rightly suggested by (), historical cost can be considered as the original cost of a specific
asset as registered in the accounting records of an entity. Majority of the business transactions
registered in the accounting records of a corporation are mentioned at the historical costs. A
historical cost can be proven by accessing the source purchase or trade documents.
Nevertheless, historical cost has the disadvantage of not necessarily reflecting the actual fair
value of a specific asset that is likely to diverge from the purchases cost over a period of time.

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As per accounting standard, historical costs has the need for certain adjustments with passage
of time. Fundamentally, historical cost varies from many other cost that are assigned to a
specific asset, namely replacement cost or else inflation adjustment cost. However, historical
cost can still be regarded as a central theme for registering assets, even though fair value is
replacing the same for certain kinds of assets (Beatty and Liao 2014). The ongoing
replacement of the historical cost by fair value system of measurement is founded on the
debate that historical cost reflects a conservative image of a corporation.
However, the choice between using fair value and historical cost system of accounting can be
considered to be a widely debated matter of concern. Nonetheless, the debate necessarily
dates back to 1990s. Unlike majority of the accounting standards, IFRS delivers a choice
between both fair value and the historical cost system of accounting for diverse non-financial
assets. In addition to this, IFRS also calls for the need of an ex-ante commitment that implies
commitment to one of the two policies of accounting (Bushman 2014). Thus, managers have
an incentive to respond to demands of the market and commit to a specific treatment of
accounting that can help in maximizing firm’s value. Again, fair value systems of accounting
for different non-financial assets have the benefit of enhanced value relevance as well as
information content, lessened asymmetry of information and augmented comparability.
Reports suggest that then usage of the fair value in place of historical cost is not necessarily
random and takes place only when advantages outweigh the costs
Evaluation of benefits and challenges of using historical cost and fair value accounting
for PPE and intangibles
AS per AASB 116, fair value can be considered as the amount for which a particular asset
could necessarily be exchanged between mainly knowledgeable, intending parties in arm’s
length business transactions. As per paragraph 15 of AAS 116 (Measurement at recognition),

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an item of PPE (plant, property and equipment) that necessarily qualifies for purpose of
recognition and can be considered as a specific asset can be enumerated at cost (Warren
2016).
AASB 138 prescribes treatment of accounting for various intangible assets that are not
necessarily with particularly in another accounting standard. In essence, this standard is
applicable to reporting entity that has the need to prepare pecuniary reports as per Part 2M.3
of mainly the Corporations Act and that is essentially a reporting entity (Wild 2015). As
mentioned in the standard AASB 138 (for intangible assets), cost is necessarily the carrying
amount of particularly cash as well as cash equivalents that is paid or else the fair value of
different other considerations that are provided to acquire a particular asset during the time of
acquisition. This standard when applicable, entire amount is attributed to the particular asset
at the time when initially recognized as per particular requirements of other standards of
accounting. As per AASB 3 (Business Combination) in case if an intangible asset is acquired
in a specific business combination, the specific cost of that particular intangible asset is
necessarily at the fair value at the date of acquisition (Callen 2015). Basically, fair value of an
intangible asset shall help in replicating expectations of participants of a market at the date of
acquisition regarding the possibility that the anticipated future economic advantages that are
necessarily embodied in a particular asset will flow to the reporting entity. In case if an
intangible asset that is acquired in a specific business combination can be separated or if it
stems from contractual or else any other legal rights, then adequate information subsists to
enumerate to asset at fair value. Reporting entity might select to recognize intangible asset as
well as grant at the fair value as per AASB 120 (Abernathy et al. 2015). Again, as per cost
model that is elucidated as per paragraph 74 of the AAS 138, after explicit initial recognition,
a specific intangible asset of an entity shall necessarily be carried at a particular revalued

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amount that is being the fair value recorded at the revaluation date after deduction of any kind
of subsequent accumulated amortisation and any following accumulated impairment losses.
Fair value dimensions and systems of accounting for property, plant, and equipment (PPE)
can be considered to be superior to particularly historical cost founded on the features of
mainly predictive value, value of feedback, timeliness, representational faithfulness,
consistency, neutrality and comparability (Williams 2016). Essentially, verifiability seems to
be the only qualitative feature that favours historical cost over the theme of fair value.
However, there are benefits as well of using historical cost for valuation of PPE in the
balance sheet. It is such that historical cost can be verified. Normally, the cost incurred at the
time of purchase is registered with various agreements, disbursements, transfer taxes and
many others. Essentially, the historical cost of particularly plant property and equipment is
also utilized for the purpose of ascertainment of the amount of the depreciation expends that
are reported on the entity’s income statement (McLaney and Atrill 2014). In essence, the
overall depreciation amount is reported as a specific deduction from the historical cost of the
asset registered on the balance sheet. However, in case of impairment, there are certain assets
that might perhaps be reported at amount that is less than the one founded on historical cost.
In actual fact, the use of historical cost can prove to be a disadvantage for those users of the
financial assertions that has the need to know the current value. Intangible assets might have
the need to be valued for variety of reasons (Trucco 2015).
It can be observed that fair value system of accounting has greater probability to be selected
for particularly PPE than any other non-financial assets as makers of property are normally
more liquid. Managers are more probable to adopt fair value when it necessarily facilitates
measurement of performance. In this case value alters in investment property are quite
informative of different operating performance at the time when capital gains are necessarily

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part of the model of business (Barth 2015). However, fair value system adversely influences
important performance dimensions in case if the management selects to hold diverse
unproductive assets.
Identification of valuation practices and for non-financial assets: PPE and intangibles
In this study, the company chosen under the Australian Stock Exchange is Woolworths
Limited, company selected under London Stock Exchange is Tesco Plc and the company
selected under the New York Stock Exchange is the Alcoa Corporation.
Alcoa Corporation: The consolidated financial statement of Alcoa Corporation is
necessarily prepared as per the accounting principles normally accepted in particularly United
States of America that is GAAP (Investors.alcoa.com 2018). This requires management to
carry out specific judgements, estimations as well as assumptions. However, this might
perhaps affect the registered amounts of entity’s assets and liabilities along with the
disclosure on specific contingent assets/liabilities at the financial statement date
(Investors.alcoa.com 2018).
In case of Alcoa Corporation, Properties, plants, as well as equipment are registered at cost.
Essentially, depreciation is registered mainly on the straight-line method at specific rates
founded on the approximated economic lives of the assets (Modi and Pathak 2014).
Particularly, for diverse greenfield assets, that indicate towards construction of various new
assets on several undeveloped land, different production mechanisms is utilized to register
depreciation. As such, these assets have the need for a considerable period (normally over
and above one-year) to boost production capacity.
Properties, plants, as well as equipment (PPE) are analysed for the purpose of impairment
whenever there are certain events or else alterations in state of affairs. This reflects the fact

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that the carrying amount of this kind of assets otherwise group of assets might perhaps not be
recoverable. It can also be observed that recoverability of assets can be ascertained by way of
comparing the approximated undiscounted flows of net cash operations associated to the
firm’s assets or else group of asset to firm’s carrying amount. Again, an impairment loss can
be detected at the time when assets’ or else carrying amount of group of assets surpasses the
approximated undiscounted flows of net cash. In addition to this, impairment loss amount to
be registered is enumerated as the excess of firm’s assets carrying value of asset group over
fair value, with fair value ascertained utilizing the preeminent information obtainable that
normally is a discounted flow of cash model (Weygandt et al. 2015). Furthermore,
ascertainment of what comprises of group of asset, the related approximated undiscounted
flows of net cash, and the approximated economic lives of assets also have the need of
considerable judgments.
In accordance with the annual report of the firm Alcoa Corporation, it can be stated that
goodwill is not necessarily amortised, and in place of that it is assessed for impairment yearly
otherwise more frequently in case if the pointers of impairment exist or else if a specific
decision to sell or exit a business is made (Investors.alcoa.com 2018). The accounting
policies mentioned in the annual report elucidates that a considerable amount of judgement of
the management is involved in the process of ascertainment in case if a specific
indicator/pointer of impairment has taken place. In addition to this, it can be hereby
mentioned that this kind of pointers might perhaps include deterioration in normal economic
circumstances, negative developments in the area of equity as well as market of credit,
unfavourable transformations in the market in which the firm operates. These indicators also
include enhancement in input costs that necessarily have an adverse impact in company’s
earnings as well as flow of cash or a consistent trend of declining flows of cash (Cortesi et al.
2015). Impairment tests of goodwill in all previous years presented reflected that the firm’s

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goodwill was not impaired. Intangible assets having finite economic lives are necessarily
amortised normally on a straight line basis methods over the time period benefitted.
Woolworths Limited: The consolidated financial statements of the entire group are
essentially the general purpose financial statements that have necessarily been presented and
prepared as per the Corporation Act 2001, Australian Accounting Standards as well as
Interpretations as well as the International Financial Reporting Standards. As per the annual
report of the firm the PPE of the entire group is essentially enumerated at cost deducting
accumulated depreciation or amortisation as well as accumulated impairment losses.
Particularly, the cost of various self constructed assets of the firm comprises of the materials
cost, direct labour in addition to proportion of overheads. The cost involved in development
properties also comprises of borrowing, costs of holding along with development till the asset
is complete (Hoyle et al. 2015). The annual financial pronouncement of the firm also
mentions that the PPE are necessarily examined according to the strategy of impairment of
non-financial assets. Again, approximation of useful lives also call for the need of important
management judgement and are analysed at least yearly. In case of Woolworths Limited,
impairment of PPE mainly associates to property impairment, store assets as well as
distribution centres relating to Home Improvement Business (Wow2016ar.qreports.com.au
2018).
Again, as per the annual report of the firm Woolworths limited, it can be hereby witnessed
that intangible assets are enumerated at cost less specific accumulated amortisation as well as
impairment losses. In case when intangible assets are acquired in a specific business
combination, specific costs reflect the fair value particularly at the acquisition date
(Whittington 2014). Also, the intangible assets of the firm having finite lives are necessarily
amortised with various finite lives that are amortised using a straight line method over the
approximated economic lives.

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Tesco Plc: Analysis of the annual report of the firm for the financial year 2016 reflects that
the financial statements of the firm are presented and prepared in compliance with the
regulations stipulated under International Financial Reporting Standards as has been adopted
by the European Union. The financial pronouncements are prepared according to the
necessities of the Companies Act of the year 2006 concerning the financial declaration of the
Group as well as article 4 of particularly IAS Regulation. Evaluation of the important
accounting policies of the firm reveals that the plant, property as well as equipment of the
firm is necessarily carried at cost deducting accumulated depreciation in addition to any
identified value of impairment. Essentially, the PPE is depreciated using the straight line
method to essentially the residual value over the estimated economic lives (Tescoplc.com
2018). Analytical evaluation of the annual report of the firm for the financial year 2016 also
replicates the fact that for non-financial assets of the firm counting the intangible assets as
well as PPE, the group undertakes impairment testing in which there are certain indicators of
particularly impairment. In case if such kind of impairment subsists, the entire recoverable
amount of the firm’s assets is approximated in a bid to ascertain the degree and extent of loss
of impairment (Hayne et al. 2014). In case where asset does not necessarily generate flows of
cash that are specifically independent from various other assets, then the group approximates
the entire recoverable amount of the overall cash generating unit.
In addition to this, the annual report of the firm mentions that intangible assets namely
software along with pharmacy licenses are necessarily enumerated initially at the cost of
acquisition or else costs that is incurred for development of asset. Again, development
expends that the firm incurs on a specific individual project is necessarily capitalized only
when particular criteria are satisfied counting the asset generated shall possibly generate
economic benefits in the upcoming period (Tescoplc.com 2018). In essence, intangible assets
that the business acquires in a specific business combination are detected at fair value at the

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acquirement date. However, after initial recognition, specific intangible assets having finite
useful lives are carried out at cost less accumulated amortisation as well as accumulated
impairment losses (Warren 2016). Essentially, they are necessarily amortised on a straight
line basis over the approximated useful lives that is at 10% to 25% of cost per annum. For
diverse other non-financial assets counting intangible assets of the firm, the group carries out
impairment testing essentially in cases where there are pointers of impairment.
Examination whether PPE and intangibles are consistent across three firms
The enumeration of PPE and intangible assets of the firm are quite consistent among the
firms Tesco Plc and Woolworths Limited while it is bit different in case of Alcoa
Corporation. In case of Tesco Plc, plant, property as well as equipment of the firm is
necessarily carried at cost deducting accumulated depreciation in addition to any identified
value of impairment (Tescoplc.com 2018). Again, in case of Woolworths Limited, PPE of the
entire group is essentially enumerated at cost deducting accumulated depreciation or
amortisation as well as accumulated impairment losses. However, in case of Alcoa
Corporation, plants, as well as equipment are registered at cost. Essentially, depreciation is
registered mainly on the straight-line method at specific rates founded on the approximated
economic lives of the assets. In case of intangible assets of Tesco Plc, it is enumerated
initially at the cost of acquisition or else costs that is incurred for development of asset. Also,
specific intangible assets having finite useful lives are carried out at cost less accumulated
amortisation as well as accumulated impairment losses. In case of Woolworths Limited,
intangible assets are enumerated at cost less specific accumulated amortisation as well as
impairment losses. Again, in case of Alcoa Corporation, intangible assets having finite
economic lives are necessarily amortised normally on a straight line basis methods.

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Opinion regarding free choice between historical cost and fair value accounting
The current study helps in understanding various advantages of IFRS that allows free choice
between fair value as well as the historical system of accounting. Essentially, IFRS has the
ex-ante commitment necessity to one out of the two policies of accounting. In essence it is as
per the interests of the management to restrict the overall scope for action in the upcoming
period, for example, management of earnings. Thus, managers have certain initiative to
properly respond to diverse demands of the market and commit to treatment of accounting
that in turn can help in maximizing the firm value. Fair value accounting for diverse non-
financial assets namely the enhanced the relevance value as well as information content,
lessened comparability (Henderson et al. 2015). Reports suggest that the choice to utilize the
fair value is not necessarily random and takes place at the time when the advantages
necessarily outweigh specific costs. However, there are also evidences that reflect the fact
that the net benefits that can be obtained from fair value system of accounting is necessarily
restricted. Essentially, it can thus be hereby stated that the choice between these system s of
accounting have the need to be mentioned in the financial statements of the firm mainly
following the adoption of the regulations of IFRS. This also needs to consistently
implemented moving forward.

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